Jonathan Pearce dropped in to say this:
How is a tax, whether it be LVT or any other, "entirely voluntary", Mark? It is a freakin' TAX.
Seriously, whatever the merits of LVT (which I have questioned over at Samizdata numerous times, as you well know*), to argue that any tax is "entirely voluntary" is bizarre.
This is where the Faux Libertarians have a completely blind spot - if you pay rent to a private landlord, they say that because you are paying to a private individual, that's fair game and voluntary, but if the state levies a land-related tax on top (e.g. Business Rates) that this is involuntary.
I'll use the same analogy I have used before and see whether people can answer the questions and grasp the logic:
1. As a matter of fact, Crown Estates** is more or less indistinguishable from any other commercial landlord, their buildings look the same as those owned by private landlords and they charge the same rents etc.
2. So let's imagine you start up in business in a certain area. The offices on one side of the street belong to CE and the ones on the other side belong to a private landlord, and you end up renting an office for £1,000 a month, on top of which there's £400 in Business Rates. Business Rates are collected by the local council but pooled nationally - they are a truly national tax on the rental value of commercial premises.
3. Our hero rents offices from the private landlord. Would he be happy to pay the £1,000 rent (because that's a 'voluntary' payment to a private organisation) but complain bitterly about the £400 Business Rates (because that's 'tax')? Probably yes, to be honest.
4. Another businessman sets up in offices across the road in the CE premises. Would he similarly be happy to pay the rent and complain about the tax? Also probably yes.
5. So let's imagine, the government henceforth declares the side of the street with the CE buildings to be a Business Rates-free 'Enterprise Zone'. Would CE get away with increasing their monthly rents to £1,400? Of course - the next person who comes along looking for office space will be indifferent between paying £1,400 rent BR-free on one side, or £1,000 rent + £400 BR on the other side.
6. Does this change our answer to 4? Surely it must. If tenants are happy to pay £1,400 rent BR-free then that is surely a voluntary transaction at market value. So the tenant isn't bothered and the government isn't bothered - if CE's profits are £400 a month higher and BR receipts are £400 a month lower, so what?
7. If the government then declares the other side of the street (where all the offices belong to private landlords) to be a BR-free enterprise zone, would they not also increase their rents to £1,400 a month? Yes they would, why wouldn't they? That's the new going rate.
8. The tenants in the privately owned offices now have to pay £1,400 to their landlord instead of £1,000 to the landlord and £400 in BR.
9. So here's the final question: from the point of view of the tenant, if the £400 he used to pay in BR count as an involuntary tax, why doesn't the extra £400 he now has to pay to the private landlord not also count as a tax (albeit a privately collected one)? Why does something stop being an involuntary tax and become a voluntary market transaction merely because exactly the same income stream is diverted into private hands?
* Yes, as true Faux Libertarians, the Samizdata regulars hate Land Value Tax, even more so than they hate income tax. I would argue that LVT is inherently a 'good' tax and income tax is a 'bad' tax, but at least they could recognise that even if LVT is a 'bad' tax, at least it's not as bad as income tax (and VAT, Nationai insurance, corporation tax etc - whereby corporation tax is also voluntary - nobody is forced to incorporate their business, are they?)
** As Dearieme points out, this belongs to the government and is not personal property of HM Queen, unlike the Duchy of Cornwall which is the personal property of the Duke of Cornwall.
Thursday, 31 March 2011
Jonathan Pearce dropped in to say this:
As well as putting his name to the Laffer Curve, another of his great observations was that tax receipts fall by far less than you'd expect when tax rate cuts are announed in advance (and rise much less than you'd expect when people know that rates are going to go up) because of timing differences. This is largely a one-off thing and not to be confused with the general Laffer effect (i.e. the increase in economic activity wholly or partly balances out cuts in tax rates and vice versa).
There was a fine example in today's City AM:
BT HAS paid the latest instalment to its pension deficit programme nine months early in order to qualify for the tax deductible corporation tax rate of 28 per cent, rather than the 26 per cent rate that will apply from April.
BT says the decision to pay £505m into the BT Pension Scheme, the actuarial value of the £525m due to have been paid in December, made financial sense. The timing of the tax deduction will also be brought forward to the first-half of the upcoming financial year.
I've often noticed that maths teachers and scientists tend to grasp economic ideas far more quickly than most people, presumably because they are accustomed to thinking up theories, then doing experiments or observing real life, and then drawing more conclusions from their observations and changing the theory if necessary. Further, proper observational scientists try to put their personal views to one side: either lead is denser than gold or vice versa, this is not up to personal interpretation.
For example, from PhysOrg.com:
The mortgage interest deduction, also called the MID, is the second largest tax break in the federal tax code and is meant to promote homeownership by allowing itemizing homeowners to deduct the annual interest payments they make on their primary residence and second home real estate loans.
For the 2011 fiscal year, the deduction will account for an estimated $104.5 billion in revenue loss for the U.S. Treasury. However, since the Reagan administration, the deduction has been viewed as a vehicle for promoting homeownership.
"In urban places suffering from neighborhood instability, underperforming schools, low social capital and poor governance, increasing homeownership rates may improve conditions in these communities. This is because when households own their housing, they have more of a stake in the success of their communities," Turner said. "But in these urban places the MID is doing the opposite; it's actually lowering the likelihood of owning a home."
The duo's study analyzed household data collected from 1984-2007 by the Panel Study of Income Dynamics. Findings showed that the mortgage interest deduction boosts homeownership rates only in areas with an abundant housing supply, like the Midwest -- but only for higher-income households.
In denser urban cities with limited housing available, the deduction actually has a negative impact, reducing homeownership and instead inflating housing prices. According to Turner, the finding is consistent with economic theory: tight land restrictions mean that the higher demand for owner-occupied housing – because of increases in the mortgage interest deduction -- will only bid up house prices without expanding the house stock, which in turn means higher down payments.
Consequently, though households may be able to make monthly payments, low-wealth households can't afford the elevated down payment. These high house prices, and therefore higher transaction costs, also make homeownership a less attractive option to mobile households that may not be looking for a long-term purchase.
Belated hat tip: Anti-Citizen One.
Conservative MP Sarah Woolaston proposed a bill under the ten minute rule motion aiming to limit the exposure of children to alcohol marketing in the UK. It would also prevent alcohol brands from sponsoring sporting and cultural events...
"This Bill aims to reduce the exposure of children to the harmful effects of alcohol marketing by actually setting out what advertisers are allowed to say and where they can say it," Dr Wollaston said.
From The Daily Mail:
The intriguing tale of one of Europe's last witch trials that convicted eight women 300 years ago is to be reinvestigated after new evidence was found...
But now Dr Andrew Sneddon from the University of Ulster intends to reveal what really happened with a reappraisal of the trial.
In his upcoming book - Witchcraft and Magic in Ireland, 1586-1946 - the history lecturer contends that their alleged victim, 18-year-old Mary Dunbar, made the whole thing up.
Cities in France whose name, if listed next to their region, sounds like a chav and her daughter
1. Lorient, Brittany (submitted by EKTWP)
2. Nancy, Lorraine (submitted by John B)
Towns in Australia which sound as if they were named after a heavy metal magazine.
1. Kerang (winner: DBC Reed).
Next Short List: Famous people who shot somebody 'by mistake' (exclude accidental suicides).
Wednesday, 30 March 2011
From The Evening Standard:
Unelected Baroness Warsi is to issue a direct plea to London's ethnic communities to oppose Britain's* First-Past-The-Post voting system by giving a speech near the site of brief skirmish which took place seventy-five years ago.
The Tory Party co-chairman will give an address tomorrow at Toynbee Hall in Whitechapel, close to Cable Street which saw a brief skirmish between pro and anti-fascist demonstrators on a Sunday afternoon in 1936. A few East Londoners took to the streets to oppose a march by a few of Oswald Mosley's blackshirts, setting up barricades and clashing with police trying to maintain order.
Lady Warsi will argue that First-Past-The-Post puts pressure on the two mainstream parties to adopt the policies of extremist parties like the BNP in order to secure the tactical votes of natural BNP supporters who are realistic enough to accept that the BNP are unlikely to ever win a seat. She will point out that the first-past-the-post system has served generations of immigrants badly.
Aides said the issue was of personal importance to Lady Warsi, a patron of "No to FPTP" who failed to win the seat of Dewsbury in the 2005 general election - the only election she ever fought before being elevated to the House of Lords as a token coloured woman - where the BNP secured 5,066 votes - more than the difference between the winning candidate and her own turnout.
"Under AV, it is quite possible that many of these BNP voters would have reluctantly given the Tory candidate, i.e. me, their second vote and I would have been duly elected," the Tory appointee will sigh wistfully, "You wouldn't believe how thick they are."
* There's no such place as "Britain", there's an island called "Great Britain", and the political unit they are referring to is more correctly referred to as "The United Kingdom of Great Britain and Northern Ireland".
From yesterday's Daily Mail:
A woman tourist was pinned to the deck of a sightseeing boat by a 300lbs stingray after it came hurtling out of the sea as she cruised off the Florida Keys. Jenny Hausch, 40, was knocked down by the spotted eagle ray, which torpedoed out of the water and slammed into the middle of her chest just after she took a photo of it.
She was trapped and gasping for air under its 8ft wide body for three to four minutes as her three young children screamed from the back of the boat.
From today's Metro:
Texan Jason Kresse, 29, and two crew members were fishing for red snapper in the early hours of Monday morning when the 8ft-long beast, weighing around 375lb, jumped aboard. It was reportedly rushing to feed on fish guts the fishermen had thrown over the side, 50 miles out to sea, when it suddenly 'hit the side of the boat' and 'ended up landing on the back [of it]'.
The shark was thrashing around so much the crew could not manage to free it to put in back in the sea.
From CapitalBay.com a couple of weeks ago:
A dolphin weighing between 600 and 700 pounds jumped onto the deck of a boat, injuring a woman in South Florida.
Isles of Capri Fire spokesman Keith Perry says a charter boat captain called 911 Sunday afternoon after the dolphin jumped on the boat and landed on one of his passengers. The woman suffered a sprained ankle. Her name was not available.**
Spotter's Badge to Pavlov's Cat for that last one.
* I'm not sure if sharks or stingrays are 'fish' in the narrower sense of the term, but hey. I know dolphins aren't, they are mammals.
** No surprises there. Imagine going through life being forced to answer "Yes" when every drunken chat up merchant asks if you are available.
From the BBC:
The assessment by UN-Habitat said that the world's cities were responsible for about 70% of emissions, yet only occupied 2% of the planet's land cover... "We are seeing how urbanisation is growing - we have passed the threshold of 50% (of the world's population living in urban areas),"
That sounds a bit doom-laden, doesn't it, but it puts me in mind of this, from City AM:
HUMANITY recently reached something of a milestone: for the first time, more than half of the global population is now living in towns and cities, rather than in the countryside where we all started off as hunter-gatherers. The global urban population is growing by 65m a year.
Cities are great for economic growth and wealth-creation: thanks to economies of scale, network effects and cluster effects, urban centres are more productive and wages invariably higher. They attract the best, most skilled and motivated people from around the world. Their size allows extreme specialisation, cultural as well as commercial...
That's more how I see things. In any event, in Western countries, people who live in cities tend to cause less pollution that people who live in the countryside because of shorter journey times etc.
Tuesday, 29 March 2011
There was a veritable feast of Home-Owner-Ist drivel in an article and the comments thereto in today's CityWire.
Let's take Council Tax as out starting point, which is a weird mixture of LVT, local income tax and poll tax. The Home-Owner-Ists hate the LVT element but cannot make up their minds in which direction they want to go: high earners want it to be replaced with a Poll Tax, justifying this with the fiction that "Council Tax pays for local services" and that everybody somehow gets the same benefit from "local services"; low earners want it to be replaced with Local Income Tax, justifying this with the "ability to pay" mantra.
We can rule out Poll Tax as a sensible tax because it is the exact opposite of welfare, and the best kind of welfare is universal, non-means tested and flat rate (so it would be easier to net off the two, or reduce people's personal allowance for income tax or something). We can rule out income tax, because that's a bad tax. And "Local Sales Tax" would be even worse, which leaves us with LVT.
"But LVT is not fair!" wail the Homeys (despite they can't agree between themselves whether they prefer a Poll Tax or Local Income Tax).
Oh yes it bloody well is fair - look at it this way; those people who are willing and able to pay the most tax get to live in the biggest houses, the nicest locations or have the biggest gardens. Those who don't want to pay so much tax, or who want to get a bigger net benefit from the system have to make way for them, is all.
To use a crude analogy - if somebody offers to go to the bar to buy everybody a round of drinks, would you begrudge him if he bought himself a double?
LVT is entirely voluntary, and if the government doesn't collect the extra rental value (spend a bit on core functions and dish the rest out again as welfare and pensions) then a private entity (landlord, vendor or bank) will do so; and as compared to 'society in general' or 'the state', that private entity has contributed nothing towards the value of the location of the home that is being rented or sold (it is easy for an occupant to affect the value of surrounding houses; it is very difficult to affect the value of your own location).
On a high turnout, the results to last week's Fun Online Poll were as follows:
Has the Fukushima catastrophe changed your attitude towards nuclear power?
No. I'm still against nuclear power - 5%
Yes. I'm now more negative about nuclear power - 5%
Yes. I'm now more positive about nuclear power - 29%
No. I'm still in favour of nuclear power - 61%
Other, please specify - 0%
Given the right-wing nature of most of this 'blog's readership, I'm not surprised that a majority are in favour of nuclear power anyway, but I'm (pleasantly) surprised to see that so many, like me, are more positive (or less negative) than they were before. As it happens, there are six nuclear power stations in the earthquake/tsunami zone, so I find the fact that only one was badly affected rather reassuring.
As ever, thanks to everybody who took part.
Health Minister Dick Puddlecote highlights another example of the ONS fighting back against the government - in the great tradition of bureaucratic warfare, they are continuing this war despite the change in government.
I actually trust the ONS. For sure, they'll bend with the political wind and publish statistics showing that alcohol-related deaths have trebled in a short space of time (or whatever) but they'll leave coded messages like "Due to a change in the way that the figures are compiled, later series are not directly comparable with earlier series" which is ONS-speak for "These figures are all complete bollocks."
All of which reminded me that I hadn't completed our Census form yet. Happily enough, you were supposed to complete it as at 27 March 2011 (yesterday) so I duly completed it this evening and answered every question with a straight bat. For the 'optional' religion question I entered 'smoker' as previously agreed (for the life of me, I can't remember which 'blogger first proposed this - I'll link if anybody tells me who it was. UPDATE: ViewFromTheSolent reminds me it was Leg-Iron). For 'nationality' I chose 'English' (not 'British') and for 'racial origin' I put 'Other - European' (being a mish-mash of anything between Northern Ireland and Poland).
So that's this week's Fun Online Poll - have you completed your Census form yet?
Vote here or use the widget in the sidebar.
Monday, 28 March 2011
In response to the Lib Dems' vague mutterings about scrapping the 50% top income tax rate and having a Mansion Tax instead, the avidly Home-Owner-Ist Evening Standard gives us a splendid rent-a-quote from the avidly Home-Owner-Ist Tory MP Mark Field:
Mark Field, Tory MP for the Cities of London and Westminster, backed the Chancellor's attempt to close loopholes but added: "Any further meddling with council tax banding would be both unworkable and unpopular."
Quite how stupid is this man? The use of the word "further" would suggest that there already had been some "tinkering". As it happens, there have been absolutely no changes to Council Tax bands since they were introduced twenty years ago, 99% of all homes are in exactly the same band as they have always been (barring those which had extensions built, and even then, the new band only takes effect when the house is sold). And rebanding or revaluing all homes would be an administrative doddle, seeing as of how everything is computerised nowadays.
And along comes the sort of thoughtless individual who votes for people like Mark Field:
I bought my property 12 years ago in Wandsworth when I got married. Both my wife and I owned flats that we sold when we bought our present home for £340k we have a 140k mortgage
Through no fault of our own the property is valued at £1m we cannot move as our kids have grown up here and go to school in the area. They have their friends here. My wife who is a nurse and I work close by. We could not afford £5,000 pa mansion tax.
Jesus, where do you start?
a. Under the Lib Dems' original Mansion Tax proposals, the tax would only apply to the value in excess of £1 million, later amended to £2 million, so this man's tax bill would be precisely zero.
b. A house worth £340,000 twelve years ago was pretty much in the top one or two per cent by value, and like most houses in London, it's trebled in value since, so it's no good him pleading poverty. This chap has made a £660,000 unearned windfall gain and he's complaining about how unfair life has been?
c. "Through no fault of his own"?? These NIMBYs and Home-Owner-Ists fight and fight in order to keep house prices as high as possible and afterwards they disclaim all responsibility?
d. I've checked Rightmove, there are plenty of 4-bed houses in Wandsworth for around the £300,000 mark, so this family would have plenty of spare change if they downsized a bit because they couldn't afford the non-existent tax bill. And sure, their commute time might be a bit longer. Well tough, join the real world.
The very next comment up goes one better:
£2m in London does not buy a mansion. Terraced houses in some boroughs go for close to that. This would be a great way to force anybody, but the super-rich out of parts of London.
You don't get much for £2 million in Mayfair or Kensington & Chelsea, that much is true (but you can get plenty for a quarter as much a bit further out), but these areas are already occupied by the "super-rich". For sure, there'll be a few people who bought decades ago who might be earning much (like the previous commenter), but to whom will these people eventually be selling their houses? To the "super-rich" of course, but that's different, innit?
Apparently it was Earth Hour yesterday at 8.30 pm. Now, being me, I had all the usual lights (and probably a couple of television sets or computers, fridge, freezer etc) turned on at the time. I wouldn't have turned them all off anyway, but as I didn't know that the Greenies wanted me to turn them all off, I was deprived of the extra pleasure of not doing so.
In other news, George Moonbat would appear to be amiably mad:
"I’m lucky enough to have half an acre of land. In normal circumstances that’s more than enough to provide all the food we need. But unfortunately it was a devastating winter and wiped out all my kale, broccoli, winter salads and slightly optimistic fruit like kiwi and figs and Chilean guavas and frost-tolerant oranges and lemons. So things aren’t looking too good."
An Englishman reckons it serves him right for gambling on global warming (tee hee) but if normal human beings were trying to be self-sufficient in the UK (and yes, it is possible on half an acre, although it's very labour intensive), would they not go for stuff like potatoes, carrots, onions, apples and maybe a few chickens or even a pig? The only vegetable on that list that comes even close is broccoli (Her Indoors grows some broccoli in our back garden, if memory serves).
In his Budget speech, little George Osborne muttered something about 'making owners of high value properties pay their fair share of taxes' (why he refers to 'residential land and buildings' as 'property' is a mystery to me).
At a mundane level, what I think he means is doing something about Stamp Duty Land Tax avoidance schemes using limited companies, or possibly he was referring to the fact he's increased the annual non-dom levy from £30,000 to £50,000* for people who have been here for more than twelve years.
On a more optimistic level, perhaps Uncle Vince is right (and he ought to know, seeing as he can just ask at the next Cabinet meeting) and little George is thinking about something like a Mansion Tax.
* What is entirely bizarre is that people in this country have no respect for real wealth, it is only 'land ownership' (which is not real wealth at all) which confers some sort of exalted status. Don't forget that the non-dom levy was originally a Tory idea a few years ago, which Labour enacted. I don't see the Faux Libertarians out on the streets comparing this to the Window Tax.
So if wealthy non-dom's are asked to pay £30,000 or £50,000 a year EACH for the privilege of living in the UK, that's fair game. But if instead they were asked to pay 0.5% of the value of their homes above a very high threshold of £1m or £2m (i.e. a levy for the privilege of living in a certain part of London or Poole, Dorset) that would be seen as an attack on 'wealth' or something.
PS, the number and type of people paying the non-dom levy and the amount of money it raises would be broadly similar to the amount raised from the Mansion Tax.
Sunday, 27 March 2011
I thoroughly enjoyed Niall Ferguson's gleeful baiting in Episodes 1 and 2, but he went off the rails a bit in Episode 3 of his series Civilisation: Is the West History, incorrectly titled "Property". His explanation of why the North American economies had been so much more successful that the South American ones, boils down to this:
A. In South America, the leaders of the original conquering armies allotted all the land to themselves in huge great estates. If you owned the land, then you also owned all the native tribes which lived on that land, so you had ready made slaves.
An autocratic, self-interested government which can direct the people to do what it wants is not going to be very successful economically (for the same reasons as the Soviet Bloc was not very successful) and even worse, after Bolivar et al fought for the independence of these countries from Spain and Portugal, nothing much really changed, it was just a new boss replacing an old boss.
Democracy never really took hold in these countries, they alternate between communist and populist presidents, interrupted by military coups. He reckoned that all these problems went back to the fact that most of the land is owned by such a small percentage of the population.
B. In the USA, he looked at the example of South Carolina (he makes us assume that something similar went on in most British colonies) and explained that whoever got their first didn't just declare that all the land belonged to themselves, they were a bit more subtle about it.
The system was that anybody (i.e. English peasants) could turn up in SC, work as an 'indentured servant' for an existing landowner for a certain length of time (wasn't quite clear how long, but must have been at least ten years) and after that, the government would allocate him some land (between 50 and 200 acres, from memory, depending on other factors, women got less than men) and the right to vote (all males who owned more than 50 acres had the right to vote).
This, he said, led to a 'property owning democracy' (more correctly, a 'land owning democracy') and as history has showed us, this worked much better than the South American non-land owning democracy. He hinted right at the end of the programme that the USA had a 'dark secret' namely that they had their own underclass, African slaves, who were in exactly the same position as the native South Americans.
So far so good, that all seems perfectly plausible - it has always puzzled me why there should be such a disparity between e.g. the USA and Mexico (Mexico counts as South America for these purposes, being a former Spanish colony).
C. So which vast chunks of the story did he deliberately omit or overlook?
1. Was the SC system not a pyramid scheme? It only works as long as there is new land for "them" (whoever "they" may be) to parcel out.
2. Was each generation of new arrivals in SC not in a subtle way a slave? Being forced to be an 'indentured servant' for an incumbent for ten or more years sounds like slavery to me, albeit time-limited.
3. He contrasts USA with South America and correctly concludes that a land-owning democracy is better than a non-land owning democracy; and a democracy is better than an autocracy or dictatorship (glossing over the other possibility - a land-owning non-democracy). Wouldn't it have been better to give new arrivals to SC the vote from Day One?
4. He did not dwell on Tom Paine's alternative vision for parcelling out land, which was instead of the incumbents using this free source of wealth to buy new arrivals into time-limited slavery, new arrivals would merely pay market rent for the amount of land they could put to good use themselves. To the extent that this market rent was more than enough to pay for the core functions of the state (which were minimal in those days), the rest would have been dished out again as a Citizen's Dividend - so even if a new arrival owned no land in the literal sense, he would have had an economic interest in it (everybody would get a pro rata share of the total rental income).
5. Niall F explained what the starting position was in North and South America a couple of hundred of years ago, and then fast-forwarded to the contrast between the gleaming sky scrapers of New York and the slums of South America. There are of course slums in the USA and gleaming new sky scrapers in South America as well of course, but this is a million miles (and several hundred of years) away from the original model of self-sufficient farmers in the British colonies.
6. The 50-acre cut off for the right to vote may have made sense (in their terms) three centuries ago, but nowadays it would be a nonsense. A single acre of Manhattan would be worth as much as a ten thousand acre farm out in Wyoming (or whatever the relationship is). And he glossed over the fact that as long as governments protect and guarantee land ownership without taxing it (and especially if they tax incomes, even of the landless, to pay for things which benefit land owners) there is a natural tendency for land ownership to become more and more concentrated (with the banks doing their best to make sure this happens).
7. So although the starting points in North and South America may have been very different, the end result is that North America is becoming more and more like South America; and if democracy never really worked in South America because a vote isn't worth much to a landless peasant, doesn't the value of the right to vote in the USA become worth less and less over time as land ownership becomes ever more concentrated in ever fewer hands (the banks are indirectly the biggest landowners of all, because they collect the rental value in the form of mortgage interest and repayments)?
8. Isn't the original SC model much the same Home-Owner-Ist pyramid scheme as governments in the UK (and elsewhere) still run today - you start your adult life as a landless peasant, and for the rest of your working life you have to hand over half of what you earn to the government in taxes, who spend a third of it on themselves; a third on things which benefit land owners and the remainder on welfare (to compensate those whom the system leaves by the wayside and to pay old age pensions to people who have been through the mill).
And of the remaining half of your income, you have to spend half of that on paying for the right to 'own' a tiny patch of land. At least in SC they were honest about it - work as a slave for ten years and then you can become a slave-owner yourself.
Just askin', is all.
We'll see whether Niall F redeems himself in the next episode about slavery. The fact that the Union states 'freed' slaves first; became an industrial power and hence defeated the Confederate states illustrates, yet again, that slavery is economically very inefficient (see also contrast between North America and South America as summarised above).
Saturday, 26 March 2011
It strikes me that the language of proper free market capitalism has been completely hijacked by what we might loosely refer to as 'rent seekers'. Having free markets is a splendid idea, because clearly a free market works better than state planning or monopolies. But the fact that something is a 'market' does automatically means that is in any way 'efficient'.
There is a sliding scale of markets, which we can broadly categorise into two extreme cases and an intermediate case:
1. Very efficient
At one end - notwithstanding that most businesses are regulated and taxed to the n-th degree, and incumbents always try to erect barriers to entry - are markets in things we are constantly producing and using, stuff like food, entertainment, cars, consumer electrics, clothes etc. I'd say that these are efficient in terms of
a) Pricing, in so far as you can go to the shop and compare all the different features and prices, talk to friends, look at product reviews, keep going back to the same shop, restaurant or make of car if you are happy and going somewhere else if you are not, and
b) In terms of the pure mechanics of how stuff is produced, like the African farmers who produce food which is eaten thousands of miles away in the west, which requires an intricate web of farmers, transporters, packers, ships and aircraft, ports and airports, lorry drivers, shelf stackers and check out girls to get from field to plate.
Similarly, all businesses have to employ people, and those that do better can pay better wages and people make a trade off between how long it takes to qualify for the job (where relevant), working conditions, wages, career opportunities, job satisfaction etc when deciding what sort of job to do.
You seldom see rapid price swings or speculation in these things. Nobody buys hundreds of loaves of bread even if they think bread prices are going to go up because they'd all just dry out or go mouldy by the time you want to eat them; no employer takes on dozens of extra staff because he thinks that wages are going to rise (or indeed sack loads of people because he thinks wages will fall); likewise people who rent tend to live in the 'right size' property and so on.
And the market value of these things is a reasonable measure of 'wealth'. A second hand car worth £5,000 is an asset or wealth which is actually worth £5,000. A year later that car has depreciated to £4,000 and £1,000 in wealth has been lost for ever. Or maybe somebody repairs an old banger and its value goes up by £1,000, that is new wealth that has been created.
2. Woefully inefficient
At the other end are 'meta-markets', which is mainly things like land and buildings or shares in companies, where you are not buying the thing itself, you are buying a right to future income which has not yet been created.
The price of land has nothing to do with the cost of producing land (which is more or less nil), the price depends on people's estimates of the future rental stream; the value of shares in a company has little to do with its net asset value and all to with people's estimates of future profits, whereby profits are a fairly small balancing figure between selling prices and input costs (which are both largely outside the company's control).
Estimates of future rental income or future profits are just that, estimates, and this has to be divided by another estimate, being a discount rate or the interest rate you could earn by sticking your money in the bank (adjusted for higher risk). So if your estimate of earnings per share is 5p, and you could earn 3% interest by putting your money in the bank, you might expect a return of 5% by buying the riskier shares, so you value them at £1 each (5p divided by 0.05).
If interest rates go up to 5%, you now apply a discount rate of 7% to the company's shares, so even if it is just as profitable as before, the price of each share falls from £1 to 71p (5p divided by 0.07).
There are then a myriad of other things to take into account - earnings growth, inflation, political risk (which is why shares in tobacco companies have such a high yield, at the back of everybody's mind is that governments around the world love to give smokers a good kicking), how successful that company will be in maintaining barriers to entry or persuading the government to do so; how good the directors will be at wringing concessions or contracts from the government; if you're buying a house you want to know that the local council will raise barriers to entry (i.e. prevent any more construction in that area) to maintain the selling price etc etc.
As we well know, share prices and house prices can fluctuate wildly, and it seldom happens the price you pay is a fair reflection of the true wealth represented by that house or that company, i.e. there are very few places in the UK where you can buy a house for its rebuild cost, and very few companies whose shares are trading at the net asset value per share.
Usually you pay vastly over the odds for these things - but this excess can melt away very quickly, or if a bubble is in progress, it can increase very quickly as well, people buy it simply because it is getting more expensive (which is the exact opposite of the bread example above).
So it strikes me that house prices (more correctly, land prices) and share prices are not a measure of wealth at all, this is not real wealth, it is merely a wild estimate of the share of future income that other people will generate using real wealth which will accrue to you as landowner or shareholder. If house prices or share prices change without any underlying change in that house or the company's business, then real wealth has been neither created nor destroyed, people as a whole have become neither richer nor poorer (it is merely a relative shift between those that own the house or share and those that don't).
There is also a massive amount of fraud and skullduggery going on in these 'financial markets', and there is no particular reason to assume that they even 'allocate capital efficiently'. The 'efficient allocation of capital' is carried out by businesses making decisions about what machines to buy, what training courses to send their staff on; or by a student who decides to study something a bit dull because it will lead to a well-paying job etc.
Worst of all are 'markets in meta-markets'. If house prices or share prices are rising, then estate agents and stockbrokers will do well, and so the perceived value of the shares in these middlemen goes up, fuelled by the general bubble, but as these people produce absolutely nothing (they do provide a service, and unlike most people I don't do estate agent-bashing), there is no real underlying value to their businesses at all, so if house prices go down a bit or the stock market crashes (leading to much lower churn), all of a sudden, the price of the shares in the middleman's business simply evaporates to nothing.
3. Intermediate case
Examples of the intermediate case are things like oil or other commodities.
People do speculate in what the price of these things will be over the next twelve months or so, and speculators clearly push up or depress the price beyond what is rational (which does cause some damage to the efficient markets) but these bubbles tend to be short lived because these are all things which have to be consumed, i.e. you can keep buying wheat futures in the hope that the price of wheat goes up, but sooner or later those contracts come up for delivery.
No speculator in his right mind actually wants to take physical delivery of wheat because the storage costs would wipe you out, so all these contracts get reversed again within a few months at the latest, so any price surge the speculators may have caused quickly gets cancelled out again.
Friday, 25 March 2011
I gave up doing these at the end of last year because I'd run out of raw material, but I just noticed this on my iPod.
Status Quo (repeat offenders) did a proficient and capable cover version of Fleetwood Mac's "Don't Stop" back in the 1990s, but for inexplicable reasons, they do a full tone truck driver's gear change at 2 minutes 18 seconds (this appears to be a live version but it's the same on their original studio version). Gloriously pointless:
From their email Bulletin of today:
Last year, empty rate relief [i.e. vacant commercial premises get a reduction in the Business Rates they have to pay] was worth £1.2 billion to businesses, and with high vacancy rates across the UK, many landlords may simply to choose to demolish empty properties instead of paying the new rates. This would mean fewer properties for business to relocate to or expand in, making recovery more difficult.
Savers who are funding their retirement with rental income from a small number of commercial properties will also be hit despite receiving no income from empty properties.
Ho hum. It's not clear to me how people can 'fund their retirement' with no income from empty commercial premises? Whether or not they have to pay Business Rates, they still have to pay interest on the loan they took out to buy it, and even if they own it mortgage-free, wouldn't they be better off selling it and buying something that does produce a regular income?
And aren't the TPA confusing 'business' (i.e. people organising themselves to produce goods and services for a profit) with 'people who own commercial premises' (for example, 'savers who are funding their retirement with assets that generate no income')? Buying a building and leaving it standing vacant is hardly a 'wealth generating business activity', is it?
From The Metro:
Mr Dover, who represented the North West England region, was expelled from the Conservative Party in November 2008 for gross misconduct after the European Parliament demanded repayment of £538,000 in illegal claims.
The money included £100,000 for three cars, £100,000 for rent and renovation costs for Mr Dover’s office – part of his Hertfordshire home – £89,000 for postage and stationery, £21,000 in telephone services, £17,500 in ‘entertainment expenses’ and £15,000 for office supplies.
A total of £959,000 went to a company called MP Holdings Ltd, which names Mr Dover’s wife, Kathleen, and daughter, Amanda, as directors...
So far, so bad...
Metro has learned he will continue to get his £235,000 MEP’s pension for his ten years’ service, which is being paid for by the British taxpayer through the Cabinet Office. ‘EU pensions are non-retractable,’ a Cabinet Officer spokesman said.
... in Portsmouth:
Motorists won’t have to wait at red traffic lights at quiet times in the future if a new plan gets the go-ahead. All the lights at a junction could be switched to flashing amber – most likely in the middle of the night. Drivers would be expected to proceed with caution, rather than waiting for the red light to change.
Highways staff at Portsmouth city council is applying to the department for transport for permission to trial the scheme in a national first. If all goes to plan, the new lighting rules could be introduced in the city within a year...
A similar system already operates in Spain and France but motoring organisation the AA cast doubt on whether it would work safely in Britain. "It sounds like a great idea but I have concerns," said Andrew Howard, head of road safety at the AA, "The idea that drunks and young drivers are going to get to the flashing lights after midnight and say “after you” is nonsense."
A tentative first step in the right diretion, methinks, but what is the man from Alcoholics Anonymous wailing on about? It is quite true that drunks and young drivers tend to be a bit inconsiderate, but the notion that merely plonking down a few traffic lights at a random selection of junctions to hold them up at random intervals will improve their behaviour is clearly insane.
Thursday, 24 March 2011
Here's one example of one of the cornerstones of Home-Owner-Ist propaganda which has entered popular consciousness over the last five or ten years:
The bigger problem is that, for good or ill, our economy now depends in significant part on the property market. Like our over-dependence on the financial sector, it's easy to see why this is a bad thing. Changing it is another matter.
To make homes really affordable would take such a price crash that, were it to happen, it would cripple the recovery and probably drive banks under. Nor are housebuilders going to build to increase supply while prices are static.
Meanwhile ordinary people have quite logically decided to invest in property — something Shapps tuts at —because of employers gutting their pension schemes. It might mean the end of Thatcher's “property-owning democracy” as we know it. But whether we like it or not, we need rising property prices.
That's just one example, but it is really quite extreme; he kicks off with a bald and entirely insubstantiated statement and then builds the rest of the article round it, cheerfully admitting that this is an unhealthy state of affairs but that somehow there is no alternative.
When challenged, Home-Owner-Ists will explain this Double-Think in a few main ways:
If prices fell, then lots of people would be in nequity. Banks would suffer such extreme losses on repo'd homes that the financial system would collapse.
That's not true. Half of homeowners are mortgage-free and LTV ratios on existing mortgages are spread fairly evenly (i.e. a tenth of mortgages are less than 10% of the current value of the home; a tenth are between 10% and 20%, and so on).
Even in an extreme (and highly unlikely) scenario where house prices fell by half; every borrower who was even one penny in nequity lost his job, defaulted and declared himself bankrupt; and the banks then repo'd and sold all those houses, the total losses to banks would be around one-sixth of their assets, which is an amount that can easily be covered by debt-for-equity swaps.
If prices fell, then lots of people would be in nequity. They wouldn't be able to trade up or down or move to where they can find a job.
For a start, the number of transactions is already at all-time low and very few people are selling, buying or moving anyway, so we already have all these negative effects.
And it's not true either. It would not be rocket science for the government to change the law so that nequity becomes 'portable', or that these debts are simply written off in 'deserving' cases (in which case see A above), or that the government assumes all or part of the liability and collects it from the borrower's future pay packets (like with Student Loans) etc.
And don't forget that for every 'forced' seller there is a willing buyer. This would get transaction numbers and hence mobility up enormously, which must be good for the economy, not to mention maximise people's happiness in terms of the size and type of home they live in.
If people's house price goes up (or stays up), they feel wealthier, so they spend more money.
This is quite obviously true, but is this a good thing in the long run? Nope.
By spending more now they are saving less, especially if they are doing mortgage-equity withdrawal, and this 'wealth effect' means that people aren't trying to go out and earn money, which is bad for the economy; even worse, the 'wealth effect' only works when prices are rising and not when they are flat.
And any decisions based on a complete illusion must lead to an unfavourable outcome:
What if, by a sheer coincidence, every single lottery ticket used the same numbers and these numbers came up on a Saturday, but Camelot's machines broke down so every single ticket holder thought he'd won a million pounds, rather than 47 pence? So millions of people would rush out on a mad spending spree for a few days or weeks before they found out the bad news?
When house prices are going down, there's a feel bad factor. Without optimism, nobody wants to invest or take risks.
This is quite probably true as well - but only as long as prices are falling.
The speed at which they are falling doesn't seem to matter, so if prices fell by ten per cent a month for six months, this would do far less such damage than if they fell at one per cent a month for five or six years (even though in either case, house prices would roughly halve). Does nobody remember the 1990s? Once house prices had bottomed out between 1993 and 1995, that's when things started to pick up again in terms of rising employment, lower government deficits etc.
Wednesday, 23 March 2011
A couple more pathetic attempts to get money pouring back into the Great British Ponzi Scheme (from para 1.121 of HM Treasury's Budget Summary):
The Budget provides help for homeowners and new buyers, and supports the capacity of the house-building industry to ensure a more efﬁcient housing market:
i. the Government will help homeowners facing difﬁculties by extending for a further year temporary changes to the Support for Mortgage Interest (SMI) scheme. The 13-week waiting period and £200,000 limit on eligible mortgage capital will now remain in force for new working age SMI claimants until January 2013;
ii. the Government will provide £250 million to support ﬁrst time buyers to purchase a new-build property. The FirstBuy programme will assist over 10,000 households with equity investments jointly funded with house-builders; and
iii. the Government will strengthen demand for residential property by reforming the stamp duty land tax rules applied to bulk purchases. This will reduce a barrier to investment in residential property, promoting private rented housing supply.
Or if you want that in English:
i. Let's cut benefits for the grubby horrible unemployed people in council housing and increase benefits for lovely clean unemployed people who have "jumped on the housing ladder", even if they are hopelessly over-mortgaged! The priced-out generation won't begrudge paying a bit of extra tax to make sure they stay priced out!
ii. We looked at this one yesterday. Pointless. They need to increase the number of first time buyers by over 300,000 a year if they want to keep the house price bubble going.
And any sane or rational person would understand the words "support the capacity of the house-building industry to ensure a more efﬁcient housing market" to mean "allow supply to rise to meet demand" but as the Lib-Cons are sticking to their guns to prevent "garden grabbing", to "preserve The Hallowed Green Belt" and reduce new home building to zero if at all possible, that is not what they mean at all. In other words, they mean precisely f- all.
iii. SDLT is, taken in isolation, a shit tax, and the new way of determining the rate is 'fairer' or at least more rational (and leads to a lower rate). But as the more detailed notes (page A112 of this) explain: "Economic impact: The reduction in the effective tax rate should stimulate demand and lead to additional transactions. Capitalisation of the tax cut may* increase the price for this type of transaction."
And isn't Home-Owner-Ism supposed to at least pretend to be about increasing the number of owner-occupiers? They appear to openly admit that it's really about helping landlords (and vendors) and protecting banks against house price falls.
* For 'may' substitute 'will'. UPDATE: if you are a fat bigot, for 'may' substitute 'might' and then for 'might' substitute 'will'.
I don't like Inheritance Tax, and I don't like tax breaks for charities either, but let's accept that the system is the way it is; we have Inheritance Tax and if you leave things to charity in your will, unlike other beneficiaries, the charity pays no Inheritance Tax.
Georgie is going one better (see here at 13:19): "From April 2012, people leaving 10% or more of their estate to charity will enjoy 10% reduction in inheritance tax, benefiting charities by £300 million."
OK, so maybe somebody just left you £1,000,000 in his will and the nil rate band for IHT was allocated to other beneficiaries. You're looking at paying 40% x £1,000,000 in IHT = £400,000 IHT and netting £600,000 unless you can do something clever, like varying the will within two years.
So you get in touch with your mate at a tame charity and chat about allocating £100,000 to his charity. In return you end up paying 36% IHT on £900,000 = £324,000 and netting £576,000. Hey! You'd only be £24,000 worse off but your mate's tame charity would be £100,000 better off!
So you agree with your mate at the tame charity that you'll split the difference and he'll bung you £50,000 in a brown paper envelope; his charity ends up £50,000 better off and you end up £26,000 (compared to the position if you hadn't varied the will and made this gift).
Unlike most in the Blue Wing of the Home-Owner-Ist party, Georgie is relatively liberal about lifting restrictions on new construction, at least as far as it pertains to new commercial premises. To back this up, they've agreed that local councils can keep all the extra Business Rates income for 25 years. All good stuff so far.
But as a populist nod to the land owners, inefficient owner-occupier businesses, NIMBYs, Greenies and other enemies of progress, they've extended Business Rates reductions for 'small businesses'. This is supposed to 'help' small businesses (it does no such thing of course, it 'helps' their landlords and owner-occupying businesses which are inefficient).
Now, don't these two measures more or less cancel out? If a local council has a choice of allowing some big commercial units to be built which will be let to branches of multinationals, then the council gets to keep all the Business Rates, but if the local council says that small units should be built instead, to be rented to 'small local businesses' then the council gets to keep nothing, because there will be little or no Business Rates payable on those new units.
The same sort of logic applies to demolishing small units and replacing them with bigger ones. The chances are that small businesses will find it harder to find premises in future, and hence will end up paying higher rents...
Unless that's the whole point?
Deniro, in the comments:
The counting system used in AV does not work. It incorrectly gives special significance* to the second choice votes of voters who vote for lower ranking first vote candidates.
The second choice votes of voters who vote for higher ranking first choice candidates are just as significant in ascertaining which candidate has a majority endorsement. Therefore it declares a winner incorrectly. The AV count system simply does not work.
Doesn't that apply in spades to FPTP? To paraphrase:
The counting system used in FPTP does not work. It incorrectly gives special significance to the second choice of voters who did not dare vote for their preferred candidate.
The second choice votes of voters who vote tactically are just as significant in ascertaining which candidate has a majority endorsement as those who genuinely prefer that candidate. Therefore it declares a winner incorrectly. The FPTP count system simply does not work.
* It does not give special significance to second pref! That is a myth!
Imagine somebody's popping to the corner shop and they ask you if you want anything. You tell him "I'd like a bottle of coke, but if they're sold out, bring me an orange juice." He comes back with an orange juice because coke was sold out. Has your second prefence been 'special significance'?
When Labour were in charge, at least they had a wide, sweeping vision of how to suck money out of the productive economy and from the young, and to parcel it out to quangocrats and the already-wealthy. The Lib-Cons share these broad ideals, but instead of having the vision and courage to throw hundreds of billions at propping up banks and house prices, the Lib-Cons think they can do it for pennies:
Mr Osborne will also announce £250m to help 10,000 first-time home buyers purchase newly built flats and houses...
According to Radio 4, the scheme is a modification of schemes which local council dreamed up last week and which home builders invented years ago (see e.g. Barratts, but they were all at it), i.e. the government and homebuilder get together to lend the gullible FTB a low interest or interest free deposit of twenty per cent of the purchase price, thus taking most of the risk away from the oh-so-fragile banking sector.
Wot? Apart from being a shit idea in principle, what on earth difference is ten thousand more first time buyers (not all of whom want to buy a new build, of course) going to make? To keep the Ponzi Scheme going, the market needs at least three-quarters-of-a-million first time buyers every year, a figure which had fallen by half by 2010 and is set to fall further.
What's in it for the home builders, you may ask. Why don't they cut the price by ten per cent rather than upping it by ten per cent but then lending the buyer ten per cent of the price?
As Adam Collyer points out, there is something called a new build premium - the resale price of a new build house falls by five per cent in the first year or two, so what this does is more or less guarantee negative equity for the first time buyer.
The whole thing is so mad that sometimes you struggle to understand how thought processes are distorted in Home-Owner-Ist economics, completely different rules of logic seem to apply.
£250m divided by 10,000 = £25,000, so assuming that's the government's half-share of a twenty per cent deposit, they would cover houses up to £300,000 or more (a lot of houses are less than £250,000, of course).
Tuesday, 22 March 2011
Let's do a thought experiment, based on a few real life facts, as follows:
1. We currently have a free market in building materials - bricks, mortar, timber, slates, floorboards, pipes, cables and the like. Anybody can buy as much of this stuff at he needs for a modest price (total cost of these for an average semi is in the order of £30,000), but he is not allowed to assemble them into a house, which would cost maybe another £50,000 in labour costs (two man-years). For that he needs planning permission.
2. The current Lib-Con government is determined to keep new home-building to an absolute bare minimum of around 100,000 new units (half of what is needed to cope with population increases resulting from longer life expectancy, even if net immigration is reduced to zero). Quite why they are doing this is a mystery to me.
3. The result of this is that the value of a fully connected building plot is around £100,000 (i.e. average price of a house minus £80,000 for materials and labour). The average price paid for the planning permission alone was recently given as £55,000 per plot , to which you add the profit/risk element of building the houses as well as the cost/value of the roads, the utility connections and so on.
4. Thus, under current rules, you can make a massive windfall gain when you get planning permission - as Sobers will confirm, the value of farm land (about £5,000 per acre) goes up to £500,000 an acre with planning (assuming ten homes per acre).
Would things be better, the same or worse if the government tried a different tack: it could completely scrap all planning restrictions, so that any land owner could build as much as he liked on his own land BUT, to prevent farmers at the edge of conurbations (where most of the new homes would be built) from making massive windfall gains and building willy-nilly, the government could draw up a short list of approved suppliers of building materials (let's say Jewson, Travis Perkins and Wolseley) and allow them to only sell sufficient materials to build 100,000 new houses (of pre-approved size and build quality) each year?
Supplementary question: let's assume an average semi in the South East sells for £300,000 and farm land in the South East currently sells for a bit more than average - around £10,000 - and labour costs to build one house are £50,000 (with other bits and pieces like road, utility infrastructure costing £45,000 per house, as above). How much would the construction materials supplier be able to charge for the building materials for one house, i.e. what would the farmer be prepared to pay for the materials to build a house and still make a profit?
My guess, FWIW, is about £200,000 (click and highlight to reveal)
From The Daily Mail:
A Government television advert to recruit teachers was ridiculed today after a 15-year-old boy spotted that a maths question has the wrong answer.
Chris Coombs, 15, noticed the mistake in the 30-second advert, which is regularly shown on Channel 4 and ITV. The Government-funded clip shows a teacher writing '(g2)7 = g?' on a whiteboard and later 'solving' it with the answer 'g2 x g7'. But the correct answer for the algebraic equation is g14...
NB, g2 x g7 = g9, not g14.
Foreign politicians who are/were married to English men.
1. Aung San Suu Kyi
2. DBR Reed came to my rescue with Helen Clark (former PM of NZ). I would have ruled out her husband on the grounds of not being English enough, but it turns out that the other person I was thinking of, Yulia Tymoshenko, is not married to an English musician at all, it's her daughter who is so betrothed, so Ms Clark is the fall back candidate. Oops.
Next up in the list of lists, a couple of very short lists indeed: Cities in France whose name, if listed next to their region, sounds like a chav and her daughter (submitted by John B), and Towns in Australia which sound as if they were named after a heavy metal magazine.
According to this week's Fun Online Poll, a quarter of people (including me) are more favourably (or less unfavourably) inclined towards nuclear power after the Fukushima disaster, for reasons which Electro-Kevin articulated thusly:
I'm more positive about nuclear power than ever. The Fukushima plant should be a ringing endorsement to everyone. Hit by a scale 9 earthquake, a 20 foot Tsunami, various explosions and still contained. It doesn't get worse than that and ours will never be subjected to anything like the stresses... short of a nuclear attack by which time it won't matter anyway.
Lo and behold, from George Moonbat's article in today's Guardian:
You will not be surprised to hear that the events in Japan have changed my view of nuclear power. You will be surprised to hear how they have changed it. As a result of the disaster at Fukushima, I am no longer nuclear-neutral. I now support the technology.
A crappy old plant with inadequate safety features was hit by a monster earthquake and a vast tsunami. The electricity supply failed, knocking out the cooling system. The reactors began to explode and melt down. The disaster exposed a familiar legacy of poor design and corner-cutting. Yet, as far as we know, no one has yet received a lethal dose of radiation.
I thought that people like Moonbat are our political compass - whatever they say is probably wrong and we just say the opposite? Bit of a moral dilemma here: do I now pretend that I supported nuclear power all along, or decide that I am actually less favourably inclined? Hmmm.
From the lengthy thread following my earlier post on the book Beyond The Corporation:
I said: "The way I understand it, his argument is that the economy works far better if those 'super profits' are shared firstly between the providers of the actual money invested (as interest) and the remainder between all the employees."
Bayard countered: "What about the the providers of the actual money invested as share capital (as dividends)? People seem to be forgetting that, before every one's money was tied up in ridiculously expensive housing, business start-ups were financed through share capital, not loans from banks."
To focus thinking about all this, I find it helpful to distinguish between 'capital' (the value of the assets of the business, which could be financed by share capital, reinvested profits or new borrowing) and 'market capitalisation' (i.e. the total value of the company's shares in existence).
Let's take Tesco's 2010 financial statements as a nice simple example and round the figures a bit:
* 'Super profits' £2,336 m (we can safely assume that they buy and sell stuff at market value and pay market wages, so this is the surplus that arises from 'economies of scale' or 'synergies' or 'dominant market position' etc).
* Employees 472,000
* Net assets £15,000 m (broadly speaking, this is land and buildings £24,000 m minus net current/non-current liabilities of £9,000 m)
* The share capital side is £15,000 m (£5,000 m share capital and £10,000 m retained profits).
* We can contrast this figure with Tesco's market capitalisation of £31,000 m.
1. So what do we mean by 'capital'? Do we mean the value of the assets employed in the business of £15,000 m? Or do we mean the total value of Tesco's shares, which is slightly more than twice that £31,000 m?
2. Which capital is 'at risk' here - the £15,000 m or the £31,000 m?
Cluebat: If - like most accountants and solicitors, the very people who go round telling everybody else to incorporate and go for a trade sale or flotation* - the business were run as an LLP, the capital employed would clearly be £15,000 m. If all the employees were members of the LLP (and vice versa), they'd have an average partners' capital of £32,000 each and the average profit share (on top of market salary) for 2010 would have been £5,000 each.
3. Assume that Tesco were run as an LLP. Maybe next year will be a bad year, profits will halve to £1,200 m and each employee-member gets a bonus of 'only' £2,500. Would they consider their wealth to have been halved, or have they still become wealthier? How would this be different if this remains a quoted plc?
Cluebat: The market capitalisation of quoted plc's is broadly speaking a multiple of earnings, that multiple being decided by 'the markets' and being largely a function of factors outside the control of the business, i.e. interest rates. At present that p/e ratio happens to be 13.2. If profits were to halve, then all things being equal, the market capitalisation falls from £31,000 m to £16,000 m. So shareholders have suffered a 'capital' loss of £15,000 m, even though actually they made a current profit of £1,200 m.
4. Or maybe next year it will make a small loss of £500 m (or £1,000 per employee-member). How much has each of them lost - £1,000 or 'nearly everything'?
Cluebat: Let's assume that we expect those losses to continue for the foreseeable. If this were run as an LLP, the members would either radically re-shape the business or pull the plug, trying to salvage as much of their original £32,000 average stake as possible and they'd get two-thirds of it back (capital minus fire-sale losses, but no redundancy costs). However, Tesco is a quoted plc, so in this case, we'd expect the market capitalisation to fall to a break up value of (say) £10,000 million (i.e. £15,000 m minus a £500 m loss, minus redundancy costs, fire-sale losses and liquidator's costs), so outside shareholders only get a third of their money back.
* This phenomenon will be the subject of a separate post.
Headline in The Metro:
"David Cameron hints Gaddafi may be killed hours after it is deemed illegal"
Monday, 21 March 2011
The results to last week's Fun Online Poll were as follows:
Which is the better investment?
Paying off your mortgage as quickly as possible/saving up cash to buy a house - 73%
Investing in stocks and shares - 27%
Please note that I was not trying to compare the respective merits of buying a house or buying shares as an investment, so I suppose I should have asked "Which is the better way of saving money?.
Nonetheless, I'm relieved that I'm with the majority on this one.
The whole Fukushima catastrophe is still rumbling on, and we still don't know what the final outcome will be. For inexplicable knee jerk reasons, a lot of countries in non-earthquake threatened areas got the jitters about nuclear power, and nuclear power generally has taken a hiding in political terms over the last week.
So that's this week's Fun Online Poll: "Has the Fukushima catastrophe changed your attitude towards nuclear power?"
Vote here or use the widget in the sidebar.
Philip's getting increasingly exasperated with the NIMBYs:
Critics say the £33billion rail link proposal from London to Leeds/Manchester is not green enough and far too expensive. But, talking exclusively to Metro, Mr Hammond launched his most scathing attack to date.
Nimby is an acronym of Not In My Back Yard – a derogatory term for people who would be in favour of something were it not taking place near their home.
‘There is not much more to their argument than Nimbyism,’ he said, ‘I hear lots of arguments about whether the country can afford it, value for money and the business case. But 95 per cent of these arguments come from people who just happen to live in [affected towns] Wendover or Aylesbury or Amersham. I don’t blame them for fighting their corner but they should be honest that their objection to this project is that it comes through their backyard. It is not a principled objection.’
Mr Hammond said instead of putting up fares, many could drop dramatically as operating companies try to compete on price with the new 250mph trains.
Ralph Smyth, of the Campaign to Protect Rural England, said: ‘It is completely wrong that this is Nimbyism. If you are spending £33billion it shouldn’t just be carbon neutral, it should be positively green.’
Sunday, 20 March 2011
I was sent a copy of Beyond The Corporation to review. To cut a long story short, having read to the very end (which took me over a week - I'm a fast reader but it's a slow read in equal and opposite measure) and understood what he trying to say (even though he never really says it), I agree with his argument, but he gets off to a bad start on pages 1 and 2:
My ancestor's achievement made him very rich, and also be brought a lot of wealth to his descendants. People who own paper mills are well off, and during my childhood we did not lack for money. If you own the mill, you ad your children and your children's children will receive all the wealth created by the endless hard work of the employees.
You don't have to do anything: it is simply given to you, it is yours by legal right, even if you have nothing to do with the mill and have never contributed anything to its success, and even if for generations your family has invested no new money in the business, other than some of what the business itself generates through the work of the employees.
Woah! What does he overlook here?
1. The owners of the mill are subject to all the rules and regulations and are e.g. at the mercy of some EU Directive which might be brought in to prevent 'intensive water use' in the same way as they have shut down a lot of 'carbon intensive' heavy industry.
2. The employees do get a lot of the 'wealth' generated by the business, as they are paid market wages (and I fail to see how wages can be anything other than market rates, or else they'd go elsewhere) which are usually about three-quarters of the net profits of the business after about half of the total income is lost in taxation.
3. What the owners/shareholders actually get is not "all the wealth", it's about a quarter of post-tax income, and is a mixture of:
a) rents (whether on the land and buildings the business owns or on patents etc);
b) return on capital invested (in the sense of 'the money tied up in all the machinery') and
c) the 'super profits' generated from 'economies of scale' or 'synergies' or 'good will' or a 'dominant market position'.
a) can easily be removed from the equation by taxing it (whether you call it Business Rates or Land Value Tax or charging for the special protection given to the owners of patents). The ridiculous salaries which CEOs pay themselves come out of (a) and (c) of course, they are not robbing from the employees so much as robbing from the shareholders.
b) everything has to be financed somehow, and in the book he explains that there is no harm in the providers of finance for the physical or intellectual investment being paid interest (he explains that the a lot of employee buy-outs are financed by bank loans if the employees themselves don't have enough spare cash).
So really, it's only item (c) that we need to think about.
To answer the question of to whom these really belong we have to ask "Who creates them?" and that is the tricky bit - no individual can really be said to create them but they are there, and as a rule 'everything has to belong to somebody'.
4. One person on his own cannot just become a shelf-stacker in a supermarket, the supermarket has to be there first. And this shelf-stacker is paid a market wage of £12,000 a year, but by combining and co-ordinating the efforts of all the drivers, shelf-stackers, check out girls, cleaners, product designers and store managers, the 'supermarket' (as an abstract entity) generates profits well in excess of all these salaries.
The way I understand it, his argument is that the economy works far better if those 'super profits' are shared firstly between the providers of the actual money invested (as interest) and the remainder between all the employees. Over time, any well run business is self-financing, so over time, an employee-owned business would generate sufficient 'super profits' to repay any loans it has taken out to buy the business (see 3 b) above) and it becomes 100% employee-owned.
5. So the shelf-stacker would end up being paid his £12,000 basic wage for work done and would receive a few thousand pounds extra as 'profit share'. For example, Tesco's profit after tax divided by the number of employees appears to be about £5,000. In the later chapters, where the book gets very technical (my favourite chapters), he explains that employees could/should be encouraged to roll up this profit share within the business, as a quasi-cash account earning interest, as insurance against unemployment and for their retirement.
6. This would leave the shareholders with nothing, of course - but who are those shareholders? By and large they will be people working for other shareholder-owned businesses, who have spare cash left over after paying off their mortgages and who are saving up for their retirement by buying shares in other shareholder-owned businesses and hoping to keep some of the £5,000 'super profits' generated by employees elsewhere.
7. So the whole 'capital market discipline' is actually a hugely expensive and inefficient way of churning money round (with plenty being creamed off by 'the City') with everybody trying to enslave everybody else. He points out that even though all the individuals working for a supermarket might not know much about the bigger picture of running a supermarket, they certainly know a lot more about it than small shareholders, pension fund trustees, investment managers and the like, so by and large, employee-owned businesses are run far better than ones owned by people with no involvement in the business.
8. "Aha!", I hear the audience shout, "If this were true, how come so few businesses are owned by their employees? Why don't they spontaneously come into existence?"
That's the sad bit of the story and where you have to un-learn a lot of what you have previously been taught as Gospel, and to which I will return over the next few days and weeks. To give you a clue, it's got to do with the confusion between current wealth created by a business in the year (which is fairly stable) and the net present value of all the 'super profits' to be created in future, i.e. the market capitalisation (which can fluctuate wildly).
Saturday, 19 March 2011
A commenter using the alias Radical Change did a fine summary of why replacing as many taxes as possible with LVT would sort out a lot of problems (e.g. house price bubbles) over at The Guardian, which earned the usual economically illiterate response (spotter's badge: DNAse):
I think the best system on land would be no taxes so that the market simply allocates resources in the most efficient way (1). But then we'd have to finance it. (2)
Having taxes also leads to an allocation of resources, but with the distorting feature of a tax (3). In your case:
- LVT would quite possibly push up the price of new developments, thereby cost the FTB more - you don't expect the developer just to eat it up, do you? (4) If it does nothing to price or supply, then why bother? (5) People don't sit on land for the sake of it, it's usually because there's no economic use for it. (6) If they could make money from it, they would (or someone else would). (7)
- the reduction of other taxes (SDRT, VAT, etc) would simply displace demand (8) and drive up prices in a natural reaction to making housing costs cheaper.(9) Before long prices would return to where they were before, (10) except property developers would be taking the excess profits you've created. (11)
It's difficult to know where to start with nonsense like that, but here goes...
1) Does he seriously think that land and buildings in the UK are currently being put to their most efficient use? And it is impossible to have land 'ownership' without taxes: rental income from land is a kind of tax, which is currently collected and/or enjoyed privately by the registered land 'owner' from time to time. Remember: land 'ownership' is impossible without a stable society prepared to recognise it and a government prepared to protect it.
2) Finance what? The tax or the cost of buying or renting land?
3) See (1). Everybody effectively already pays this tax ('ground rents'). If you are a tenant, you pay it to the landlord as part of the rent; if you have a mortgage, you pay it to the bank; if you are an owner-occupier who's paid off his mortgage, you are simultaneously earning and consuming, i.e. spending, the value of those land rents on yourself (you could, for example, rent out your house and rent yourself somewhere smaller or move abroad). This transaction is invisible but very real, and because the government in its infinite wisdom decides to tax incomes (i.e. wealth creation) rather than ground rents, the government then collects a similar amount in taxes on your income to the amount of ground rents you are earning/consuming.
4) Nope. The developer won't "sit on it", but the windfall gain made by the owner of the land when planning permission is granted will make a smaller windfall gain (see example in footnote*). It may well be that the developer already owns the land at the time planning is granted, so counts it as part of his development profits, but actually it's quite a different kind of income. I say to all my property developer clients that they make 80% of their profit with 20% of the risk by getting planning; building the buildings is the expensive, risky and stressful bit (so far they have all agreed with me).
And LVT in isolation can't possibly 'push up house prices' (see footnote again*). It may well be that scrapping taxes on incomes pushes them up, or the fact that the government or the council will be motivated to spend money in such a way as to make the UK or your town a more desirable place to live pushes them up (rents would probably double, but as most people's disposable incomes would double, that's not a problem).
Think about it: the price of new houses and second-hand houses are broadly in line with each other. Whatever restrictions or taxes you apply to new houses have the same impact on second-hand houses. Strict planning laws push up the prices of all houses; if LVT pushed up the price of new houses, then it would also push up the prices of second-hand houses, so why aren't the Home-Owner-Ists cheering for it?
5) It wouldn't be too difficult to tweak the variables of a full-on Georgist system (relaxing planning restrictions, the LVT rate, the amount spent on Citizen's Dividend and the amount spent on repaying public sector debt) so that the buying house prices went up or down or stayed the same. But if nothing happened to price or supply, then this is surely A Good Thing? A wholly non-distortionary tax!
6) Woah! People "sit on land" in the hope of making windfall capital gains (largely tax-free in the case of owner-occupiers). Tales abound of vast new cities being built in PR China where all the flats are snapped up by "investors" and left vacant, because they think they can make more more in capital gains by leaving the flats empty than they can in income by renting them out (so far, they have been right).
7) See (6). The gimmick with LVT is that instead of leaving those flats vacant, the only people who would buy those flats in China would be people who actually want to live there or who want to rent them out.
8) Displace demand from where to where? How can a tax-free productive economy be seen as misallocation of resources? Very few people buy food, televisions or cars just to put them in storage in the hope that the price will go up, you just buy what you need, want and can afford.
9) Can he make up his mind - would LVT push housing costs up or down?
10) Ah... he's changed his mind yet again.
11) Surely nobody minds the developer making a profit from the actual construction? What he might be referring to is the windfall planning gain, which is easy to tax away by e.g. auctioning off planning permission or simply hiking the tax rate so that the market value of building plots falls from £55,000 to plus/minus nothing? In a Georgist world, the developer has to pay nothing up front for the land, he just pays the LVT during the construction period, which would probably be about the same as all the PAYE and corporation tax he currently pays.
* We have something in the UK called "Business Rates" on commercial premises (which is pretty close to LVT) and we observe that:
1. Commercial premises only cost half as much to buy per square foot as does residential (you make a massive windfall gain if you can get planning to convert from commercial to residential). The higher tax (BR compared to Council Tax) pushes the price down, not up.
2. Offices and factories and shops still get built, despite the tax (and despite the best efforts of the NIMBYs).
3. When Labour started phasing out empty premises exemptions, occupancy rates went up (which is hardly surprising, if you tax something you get less of it, so if you tax empty premises, they magically turn into occupied ones).
Friday, 18 March 2011
A couple of the papers mentioned an NAO report, which praised the UK government for having saved money by buying back outstanding debt in Bradford & Bingley and Northern Rock, which is a variation on the general theme of debt-for-equity-swaps. The NAO report summarises as follows:
4.1 Over the course of 2010 Northern Rock (Asset Management) and Bradford & Bingley [after they had been taken over by the UK government] bought back £2.4 billion of their outstanding subordinated debt for £821 million in cash.
4.2 The debt was trading at substantially below its nominal value (i.e. the amount originally advanced by the investors), principally because:
a. It is not known if and when the principal and accumulated interest will eventually be paid. This makes it difficult for investors to value the debt and makes the bonds particularly unattractive to investors who seek a short-term investment.
b. Although the debt continues to accumulate suspended interest into a sum to be paid once the providers had returned all the taxpayer support, the terms of the debt do not allow interest on the interest (it is non-compound). Consequently the value of the debt and its interest falls with inflation and the money value of time.
c. There is still uncertainty regarding possible future government intervention and the potential for the Government to remove its loans, guarantees and assurances.
d. More generally, market risk remains high for the mortgage sector, and in particular there continue to be concerns about the quality of the mortgages in the mortgage providers’ books.
All good stuff, but it's a pity they didn't just do this years ago when the banks first became insolvent (in the sense that their liabilities, including bonds, exceeded the value of their assets).
Think about it:
1. By and large, the market price of the bonds would be the original principal amount minus all the potential losses of the bank (assuming share capital already wiped out).
2. So if somebody comes along and buys all the bonds and takes over the bank, that person doesn't actually lose a penny if he continues to run the bank, because the losses were all borne by the previous owners.
3. That new owner can cheerfully write down the balance sheet value of the bonds to the amount he paid for them, or convert some of the bonds into equity, it doesn't really matter. If you own all the shares and all the bonds in the bank, the total value of your holdings is much the same however you account for them.
4. As it happens, the total losses suffered by even the worst-run UK banks (B&B and NR), mainly on irrecoverable mortgages, were nowhere near as much as the amount of bonds in issue; therefore the bonds/bondholders could absorb the whole loss and the bonds always had some value (a third of their original issue price, in the above case).
5. Conversely, depositors' money was never really at risk (the UK government has always guaranteed deposits up to a certain level, it was just over £30,000 per person at the time), provided of course the government was prepared to take a firm stance and rank depositors ahead of bond holders in order of priority on a liquidation (and it is the government which writes the insolvency laws...)
6. Therefore... the government (or indeed anybody with sufficient billions to play with and the nerve to see it through) could have sorted out NR and B&B without losing a penny, or needing to actually invest any money directly into those banks, possibly even making a profit if they timed things right.
People used to tell me that I was mad to believe that you could sort out banks using debt-for-equity swaps. I think history is proving me right.
From the BBC:
Councils in England could keep taxes raised from local businesses to make them less dependent on Whitehall funding, under government proposals.
Currently £20bn of business rates are collected by councils but sent to central government, which redistributes them according to need. Communities Secretary Eric Pickles said that was a "disincentive to growth" and is reviewing council resources... He said the current system penalised "economically successful" councils and the government wanted to reduce dependency on Whitehall grants for as many councils as possible.
The government hopes that allowing councils to keep their own business rates will be an incentive to encourage private sector growth and regeneration by giving them a "direct stake in the future of their area".
That's another one straight out of UKIP's 2010 manifesto, of course, but hey.
The gimmick is that councils are given funding from Whitehall largely on a per capita basis (and Labour governments give more to Labour-run councils; Tory governments give relatively more to Tory-run councils) and councils can keep all the Council Tax they collect (about a fifth of their income); but councils have to hand over all the Business Rates they collect.
It doesn't take two minutes to work out that this is why councils have no particular incentive to attract businesses to their area, allow new factories to be built etc (in the face of stiff opposition from the NIMBYs and Greenies) and are happy for commercial premises to be converted to residential - although the total tax take from residential is much lower (it falls by about four-fifths when commercial premises are converted to residential), the council can keep all of it, plus the money that Whitehall dishes out per capita.
And as Business Rates is fairly close to Land Value Tax, it's the best way of collecting tax.
Thursday, 17 March 2011
Among the dozens of unwritten rules of composing pop songs are
1. You don't have different songs with similar names;
2. The name of the song = the chorus (the bit you hum when you're waiting for the 'bus), not the 'bridge'; and
3. Between 'verse' and 'chorus' you have something called a 'bridge', which builds the tension a bit between the two.
For sure, rules are there to be broken, but REM manage to break all three to ill effect with "Mine Smell Like Honey" from their new long player. For a start, you'll be disappointed that it's nowhere near as good as Me in honey. The intro and verse are cool enough, you assume they are building up to the usual REM 'uplifting chorus' bit, but then the song sort of stops and there's a really clunky bit where they sing "Mine smell like honey" which is completely out of context and drags the whole thing back to the ground.
Because that's the name of the song, you initially assume that it's the chorus - which ruins the whole song - and that the bit after that (where they sing "Dig a hole, dig it deeper, deeper") is some throwaway filler bit. It's not - that is the actual chorus!
Once you grasp that the official song name ("Mine smell like honey") is the result of an administrative cock-up at the pressing plant and work on the assumption that the chorus is actually the bit where they sing "Dig a hole, dig it deeper, deeper..." and hence that the song is really called something like "Dig a hole", it's actually a brilliant song: